Investment Environment - Spring 2020
By now any reader of this commentary has heard plenty enough about COVID-19 and the disruption it is causing to our usual routines. As an economic event, the current situation is distinct from those we have faced in the past. Nevertheless, the event-driven market shock that a pandemic causes is of a textbook variety. The shock is painful but it will prove to be temporary. Meanwhile, our success in navigating tumultuous financial markets is critical for us if we are to reach our cherished, long-term financial goals. That success is the product of effective investment management that is combined with outstanding investor behaviour. Never is the partnership between client and advisor more vital than at times like these.
The most surprising and concerning aspect of events thus far has been the shut-down of businesses deemed to be non-essential. The short-term levels of unemployment and of corporate profit impairments will be very difficult for workers and investors to digest. When public officials announce a gradual normalization of economic activity, I expect firms to return to business with the intention to make up for lost time. In theory, financial markets should settle down since stock prices represent the present value of all future earnings of companies. In practice, when short term results suffer, the market frequently overshoots to the downside before resuming its normal, semi-steady rise. We therefore have to expect markets to be rocky for the foreseeable future.
My preference as an investment manager is to be a long-term strategic investor who only trades when a better investment idea leads me to replace one that has grown stale or disappointing. In the last six weeks, however, I have found myself trading actively in the face of disorderly markets. When I first heard news of the threat from Wuhan, I sold some stocks so that I would have ammunition to buy stocks cheaply if markets fell hard. This created opportunities that we have seized, and led to further opportunities to sell into strength and to buy into weakness. I told one client on the telephone that I felt like I was driving on a highway at high speed in the opposite lane, swerving to avoid oncoming obstacles. All along the way we have remained substantially invested in equity markets. The opportunistic trading techniques we have employed are not intended to “time the market.” So far we have been successful at mitigating portfolio losses. As I write this commentary in mid-April, most fully discretionary portfolios are down around ten percent in 2020.
In January, I wrote to you that every investor who has stuck to a plan in the face of volatility has created great wealth in the process. Of course, in the distant world of January this was easy to point out, since we were enjoying all time high portfolio valuations. Today our fortitude is being tested. Please remember that without volatility there would be no premium return available to stock market investors. Together, if we continue to make good decisions and to trust in our historically proven strategies, then we will come out of this episode even stronger than before.
Mark Lloyd, Ph.D.
Vice President & Portfolio Manager